CGST Section 137 — Offences by companies

Act Section 137 outlines how offenses committed by companies under the GST law are handled and who is held responsible. It essentially aims to pierce the corporate veil and hold individuals accountable for the company's GST-related wrongdoings.

This section applies when a company (which, as defined in the Explanation, includes not only body corporates but also firms and other associations of individuals) commits an offense under the CGST Act. Critically, it extends liability beyond just the company itself to certain individuals associated with the company. This includes anyone who, at the time of the offense, was in charge of and responsible for the company's business conduct. This typically includes the Managing Director, CEO, or other individuals with significant operational control.

Furthermore, it also targets those who might not have been directly responsible for the day-to-day operations but were complicit in the offense. This includes directors, managers, secretaries, or other officers if the offense was committed with their consent, connivance, or due to their negligence. The scope extends to partnership firms, LLPs, Hindu Undivided Families (HUFs) and Trusts, holding the partners, Karta, or managing trustee liable respectively.

Here are the key conditions and exceptions of Section 137:

• Primary Liability: Individuals in charge of and responsible for the company's business are initially deemed guilty.
• Secondary Liability: Directors, managers, secretaries, or other officers can be held liable if the offense was committed with their consent, connivance, or due to their negligence.
• Partnership/LLP/HUF/Trust Liability: Partners, Karta, or managing trustees are held liable for offenses committed by their respective entities.
• Due Diligence Defense: An individual can escape liability if they prove that the offense was committed without their knowledge or that they exercised all due diligence to prevent the offense. This is a crucial exception.

Let’s illustrate this with a couple of practical examples:

Example 1: Input Tax Credit Fraud

Imagine a private limited company, "ABC Pvt. Ltd.", is found to have fraudulently claimed input tax credit (ITC) based on fake invoices. The CFO, Mr. Sharma, was directly responsible for overseeing the company's finances and GST compliance. In this case, both ABC Pvt. Ltd. and Mr. Sharma will be held liable under Section 137. Now, if it can be proven that the managing director, Ms. Verma, was aware of this fraud and actively encouraged it, she would also be liable. However, if Ms. Verma was unaware, and had put in place internal control systems to prevent the fraudulent claim of ITC, the "due diligence" exception might apply.

Example 2: Evasion of Tax by a Partnership Firm

"XYZ & Co.", a partnership firm, underreports its sales to evade GST. Mr. Patel, one of the partners, is responsible for managing the firm's accounts. Both the firm and Mr. Patel would be liable. If another partner, Mr. Gupta, had no knowledge of the underreporting and had no role in the firm's finances, he might be able to argue that the offense was committed without his knowledge.

It's crucial for businesses and their responsible individuals to implement robust internal controls, maintain accurate records, and stay updated with the latest GST regulations to prevent unintentional offenses and be able to demonstrate "due diligence" if needed. The burden of proof rests on the individual to prove lack of knowledge or exercise of due diligence.

The CGST Act and its sections, including Section 137, came into effect on July 1st, 2017. Since then, there have been no major amendments to Section 137 itself. However, it is important to keep track of judicial interpretations and case laws that may further clarify the scope and application of this section.